Special Report: Muskrat Falls hydro electric power project

The deal, the controversy —and if the project is really worth it

He said it—and boy, did he do it. Only a week prior to his monumental resignation as Premier of Newfoundland and Labrador, Danny Williams finally achieved his self-professed ultimate career goal of reaching an agreement for the development of Churchill Falls.

A massive hydroelectric project to develop Muskrat Falls, the lower portion of Churchill Falls in Labrador has been given the green light by the Federal Government. In a landmark deal, the provinces of Newfoundland and Labrador and Nova Scotia signed an agreement with Nalcor Energy and Emera (TSX:EMA) to begin development of this 6.2 billion dollar hydroelectric deal. With major investments from both Nalcor and Emera, the provinces are set to begin the process of appealing to the Federal Government for $375 million in federal infrastructure funding.

The question now remains: is this a viable source of future revenue for the provinces, or the remnants of a historical provincial battle?

The notorious contract

Danny Williams, infamous for his overblown rhetoric, has said the Muskrat Falls deal will liberate Newfoundland and Labrador from the “geographic stranglehold of Quebec”. His articulation, while undoubtedly flaming the fanfare, is in fact a fair portrayal of the deplorably unbalanced deal which left Newfoundland and Labrador unable to profit from its own natural resource for the last forty years. The notorious Churchill Falls contract, in essence, gave Quebec the rights to sell power generated on a site owned by Newfoundland and Labrador. It is widely considered the poorest decision ever made in resource development.

The massive Churchill Falls generating station is the second largest hydroelectric plant in North America. The unusual terms of the 1969 agreement—allowing Quebec to reap unusually high rewards and the majority of the profits from the massive hydro project—are a common discussion amongst Newfoundlanders, in particular during the last decade of tough economic times and the collapse of the fishery. The Falls, geographically located in Labrador, are essentially controlled by Quebec via transmission lines which cross its territory, through which Quebec sells power for large profits in North American markets. It is estimated that Quebec has reaped over $19 billion in revenue over the years, while Newfoundland and Labrador have profited only $1 billion.

The ill-fated agreement was the end result of a poorly constructed 65-year contract selling the vast majority of Churchill Falls power to Quebec, retaining only a tiny fraction of the power for domestic use. How could such a hapless deal possibly occur? The contract made no allowances for inflation despite being set until 2041. Hydro-Québec would pay three-tenths of a cent per kilowatt hour for the first five years of the arrangement, at which time the price would decrease periodically until reaching one-fifth of a cent in 2016. Quite simply: today, it is virtually free.

As the oil shortage of the 1970s caused energy prices to skyrocket, Québec sold much of its hydroelectricity to foreign markets for considerable profits—a practice it continues today. And as inflation caused energy prices in general to rise, Quebec’s profit margins only grew; much to the distaste of Newfoundland and Labrador. Numerous political leaders attempted to reach an agreement over the years and re-open the agreement with Quebec, but the Supreme Court had no choice but to uphold the contract—as faulted as it may be. Despite efforts to rectify the situation, nothing ever came to fruition and the resentment between the provinces festered.

Enter Danny Williams—a boisterous, vocal politician, who made it a goal to find an end-run around Quebec’s hold on the resource.

The Muskrat Falls development

The landmark deal, announced during November 2010, is designed to allow energy from the falls to bypass Quebec, thus eliminating the need for the transmission lines owned by Quebec. The 35-year deal utilizes the resources of both public and private sector, using the combined forces of the provinces of Newfoundland and Labrador and Nova Scotia with Nalcor and Emera.

Emera, the Halifax-based energy company, grew out of Nova Scotia Power and in recent years has experienced a notable period of growth, acquiring numerous assets throughout the Eastern Seaboard and in the Caribbean. The company strategy focuses on clean energy sources, primarily electricity. Nalcor is Newfoundland and Labrador’s crown-operated provincial energy management body, and oversees all projects relating to energy in the province.

The intent is to build a transmission link from Labrador to the island of Newfoundland for a cost $2.1 billion, of which Emera will invest about $600 million. Emera will, in return for its investment, receive 20 per cent of the energy from Muskrat Falls for 35 years. The power will be transmitted via underground cables across the Strait of Belle Isle to Newfoundland, and from there across the Cabot Strait into Lingan, Nova Scotia—effectively bypassing Quebec.

The Premiers, Darrell Dexter of Nova Scotia and the recently appointed Kathy Durndale of Newfoundland and Labrador, are appealing to the Federal government for $375 million in funding, intended to ease the burden of the loan from Emera. Jean Charest, Premier of Quebec, has been vehemently opposed to the federal government even considering the funding elements of the project. Understandably perhaps—Quebec has been reaping the rewards of the ill-fated contract for years. And while Charest has every right to vocalize his oppositions, the benefits of the project seem evident across the board.

The Muskrat Falls development will lead to a significant reduction in carbon emissions; estimates sit at 96 million tonnes by 2065. Newfoundland and Labrador will be consuming 98 per cent renewable energy by project completion, a major consideration given the continually increasing government mandates to reduce emissions. The development will also allow Newfoundland and Labrador Hydro, a Nalcor subsidiary, to stop burning oil at its generating plant in Holyrood. In Nova Scotia, hydroelectric power will be pitched as a replacement for coal. The environmental benefit is the primary argument which will be presented to the Federal Government—and a highly convincing one. Newfoundland and Labrador in particular is not on a green crusade nor opposed to oil; the province witnessed an economic rebirth from its offshore projects. Rather, quite sensibly, it is proposing something which can greatly assist the Federal Government’s overall goals in reducing greenhouse gases.

Can it really work?

Both Nalcor and Emera intend to sell surplus energy to foreign markets—which is the point where some questions arise. There is speculation amongst energy experts that hydroelectric energy does not have the same profit margin it once did. A boom in low-cost natural gas generation and the recent economic downturn in the U.S. have resulted in a much smaller demand from Canada for energy in recent years.  The North-Eastern U.S. simply doesn’t have the same insatiable demand for hydroelectric power that it once did. That being said, there are still major benefits to the Atlantic Provinces joining forces to create their own, viable clean energy source.

The project will create a surge in employment for the Atlantic Provinces during construction, a much needed addition to the region. Furthermore, elements of the project which cannot be created in Newfoundland and Labrador or Nova Scotia—such as steel fabrication—will boost employment in other provinces as well. Darrell Dexter said the project “truly is Atlantic Canada’s CPR” to the Halifax Chamber of Commerce recently.

The Muskrat Falls deal may indeed be a bitter end run around Quebec, but the overall benefits outweigh the resentful motives of the provinces. Canada should be supportive and contribute well-deserved funding money to a project with so many clear and measurable advantages. The development of Muskrat Falls into a clean energy source can only benefit Canada as whole: helping to eliminate carbon emissions and meet government targets, stimulating the economy, and ultimately, inducing a rare moment of collaboration between the Atlantic Provinces for the betterment of the region as a whole.